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Final Rule Strengthens Consumer Protections for Workers Requesting Disability Benefits from ERISA Employee Benefit Plans

11/20/2017  |  By: Mark Blackburn, CPA, Shareholder, Audit and Advisory

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On October 18, 2017, the Auditing Standards Board (ASB) met to discuss their proposed new Statement on Auditing Standards (AU-C Section 703, Forming An Opinion and Reporting on Financial Statements of Employee Benefit Plans Subject to ERISA). As of September 8, 2017, the ASB had received 68 comment letters from CPA firms, plan sponsors, state societies of CPAs, and other entities.  By October 18, 2017, the ASB has received more than 100 responses to their request for comments on this proposal. 

As discussed in the previous article, there are several provisions in the new standard that will impact plan sponsors.  The significant provisions that will affect plan sponsors and a summary of the responses from the comment letters follows:

  • Proposed audit report to include expanded management responsibilities section – the proposed audit report includes the paragraphs below (emphasis added):

We have been informed by management that a qualified institution holds the investments and executes investment transactions. Management has obtained certifications from the qualified institution as of December 31, 20X2 and 20X1, and for the year ended December 31, 20X2, stating that the investment information, described in Note X to the financial statements, is complete and accurate.

Management’s Responsibility for the Financial Statements and the Limitation on the Scope of the Audit

Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

Management is also responsible for determining whether a limitation on the scope of the audit is permissible in the circumstances, in accordance with the Employee Retirement Income Security Act of 1974, including evaluating whether

  • the certification is prepared by a qualified institution, and
  • the certified investment information is complete and accurate.

The limitation on the scope of the audit does not affect management’s responsibility for the financial statements. Management is responsible for determining whether the certified investment information is appropriately measured, presented and disclosed in accordance with accounting principles generally accepted in the United States of America.

Management is also responsible for maintaining a current plan instrument including all plan amendments, administering the plan and determining that the plan’s transactions that are presented and disclosed in the financial statements are in conformity with the plan’s provisions, including maintaining sufficient records with respect to each of the participants, in accordance with sections 107 and 209 of the Employee Retirement Income Security Act of 1974, to determine the benefits due or which may become due to such participants.

These paragraphs do not change management’s responsibility for the audit and for determining the appropriateness of requesting a limited scope audit.  However, these responsibilities are more clearly spelled-out in the audit report.  The primary objective seems to be to remind plan management that they, not they auditor, are responsible for determining whether a limited scope audit is appropriate and whether the certified information is correct.

There were no objections to this provision in the comment letters.

  • Proposed audit report to include a section on findings on specific plan provisions – as part of the plan audit, the auditor performs testing on the significant provisions of the plan (eligibility, vesting, definition of compensation, use of forfeitures, etc.).  The proposed standard will require the audit report to include any findings related to these plan provisions.

This proposed section would potentially have the greatest impact on plan sponsors as these reports are made public when the audit is filed with the Department of Labor.  Fortunately, 94% of the comment letters were not in favor of including this section in the audit report.  With such overwhelming results, hopefully the ASB will remove this section from the proposed audit report.

We believe the ASB still feels that changes need to be made to employee benefit plan audit opinions to address challenges with audit quality.  However, we do think they will listen to the feedback provided and make some changes to the proposed audit opinion.  We will continue to monitor the process and keep you informed as the process moves forward.  If you have questions or concerns, please let us know.

Posted in: Audit